Free Trade with China? No, Gracias

Cristina Fernández and Wen Jiabao in a videoconference with Dilma Rousseff and José Mujica. Credit: Office of the president of Argentina

BUENOS AIRES, Aug 8 2012 (IPS) - There is little likelihood that South America’s Mercosur trade bloc will take up China’s proposal to establish a free trade agreement, at least in the short term. Experts and industrialists fear an invasion of cheap Chinese goods, and unequal competition.

Although the sources consulted by IPS agreed that trade and investment between Mercosur (Southern Common Market) and China will continue to expand, they said a free trade deal was unrealistic under the present circumstances.

Chinese Premier Wen Jiabao expressed interest in such an agreement on his Jun. 25 visit to Buenos Aires, in a videoconference with Presidents Cristina Fernández of Argentina, Dilma Rousseff of Brazil, and José Mujica of Uruguay.

The four leaders welcomed the idea of forging closer trade ties between Mercosur and China.

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Paraguay, Mercosur’s fourth founding member, has been suspended from the bloc since that country’s legislature removed President Fernando Lugo in a lightning-quick impeachment trial on Jun. 22.

At any rate, Paraguay is facing the dilemma of maintaining diplomatic relations with Taiwan or agreeing to cut off ties in order to negotiate with Beijing.

The fifth full member of Mercosur, Venezuela, had not yet been admitted to the bloc at the time of the videoconference. It officially joined on Jul. 31 in Brasilia.

At the last Mercosur summit, held in the Argentine province of Mendoza four days after Wen’s visit, the governments of Argentina, Brazil and Uruguay agreed to strengthen cooperation with China.

They also approved a proposal to send a joint trade mission this year to China ‘s commercial hub, Shanghai.

But they did not elaborate on the Asian giant’s suggestion of freeing up trade, which analysts agree will be a long, complex process.

Mauricio Mesquita Moreira, an Inter-American Development Bank (IDB) expert on international trade, said the conditions are not in place for reaching a free trade deal in the near future.

“On one hand, Argentina and Brazil have industries that are highly vulnerable to competition from Asia. And on the other, the state still has too much of an influence in the promotion of industry in the Chinese economy for Mercosur to accept a liberalisation of trade,” the Brazilian economist told IPS.

“The smaller partners, Uruguay and Paraguay, lack industrial structure, and could benefit from an agreement with China. But being in Mercosur also gives them benefits such as privileged access to the bloc’s larger markets,” he said.

Mesquita Moreira was in Buenos Aires this month to present a study carried out by the IDB together with experts from the Asian Development Bank Institute, which analyses the future of ties between Asia and Latin America.

The study recommends an increase in trade and investment between the two regions.

Argentine economist Guillermo Rozenwurcel, director of the Centre for Research on Economic Development in South America (IDEAS), said “the Chinese proposal is not viable in the least, over the next 10 to 15 years.

“The presidents gave a diplomatic response to the Chinese interlocutors, to show that they had listened to the proposal. But until the playing field is level, there are few prospects for real discussions on free trade,” he told IPS.

Rozenwurcel also said there was little “political margin” for considering the question.

On the other hand, “there is a challenging and complex, but possible, outlook” for boosting trade, investment and scientific and technological cooperation between this region and Asia, he added.

According to the study by the IDB and the Asian Development Bank Institute, trade between Latin America and Asia has grown by an average of 20.5 percent a year since 2000, to 442 billion dollars today.

With that sharp increase over the last 12 years, China, Asia’s biggest supplier of imports to Latin America, is now the region’s second largest trading partner, after the United States.

Abeceb, a private consultancy in Argentina, reported that trade between Mercosur and China climbed from 10.3 billion dollars a year in 2003 to 77.9 billion dollars in 2011, and could reach 200 billion dollars by 2016.

But Abeceb also noted that in the same period, Argentina’s purchases of manufactured goods from Brazil such as textiles, capital goods, plastics or pharmaceutical products fell as a result of competition from lower-cost imports from China.

In the case of textiles, for example, 56 percent of Argentina’s imports came from Brazil in 2003, but today that proportion is less than 23 percent. Meanwhile, purchases of textiles from China grew from two to 34 percent of the total.

And while footwear imports from Brazil fell from 79.2 percent to 37.5 percent between 2003 and 2011, purchases from China rose from 12.6 to 36 percent in the same period.

The president of Argentina’s toy industry chamber, Miguel Faraoni, said a free trade accord between Mercosur and China “would be very counterproductive.”

“Competition is impossible due to the differences between the policies of each one. China produces between 75 and 80 percent of the toys sold around the world, which means it would be an unequal fight,” he said.

Faraoni said the share of locally produced toys sold on the domestic market has gone up from 10 percent in 2002 to 50 percent today. He also noted that the number of foreign companies producing toys in Argentina has increased.

“Production, employment and investment in machinery and new technologies have grown, and we are exporting eight percent of what is produced to the region and to the Latino market in the United States,” he said.

Faraoni stated that Argentine industry could compete in terms of price and quality with Brazil, “which has the same rules of the game,” but that “opening up the market to China would reverse the gains made in the last few years.”